State of Nevada

State of Nevada

Controller's Annual Report

Ron Knecht, State Controller

For Fiscal Year Ended June 30, 2018

HIGHLIGHTS AND TABLE OF CONTENTS

I.

State Spending (pages 2-3) ? Over the last dozen levels of education suffer administrative bloat and operating

years, state spending has grown faster than Nevada's inefficiency.

economy, thus imposing an ever larger real burden on Nevada families and businesses, whose real incomes have declined over that time. Rapid increases in spending on Health and Social Services (HSS) and K-12 education are driving state spending growth. HSS and education (K-12 and higher) grew to comprise 79% of total state spending of $12.8 billion in FY18, while all other state spending in total declined significantly in real terms since FY06.

V. Public Employee Compensation and Benefits (pages 10-11) ? Current compensation of state employees, except those in higher education, is overall at market levels, but higher for lower-level positions and lower for top-end jobs. Nevada local government compensation is among the highest in the nation and continues to require increases in taxes that are already very high. Public Employee Retirement System contributions required of state employees

II. State Revenues (pages 4-6) ? Non-tax revenues (higher education does not participate in PERS) and from

? grants and contributions to the state, charges for services taxpayers continue to rise in real terms. PERS's coverage

and contract revenues ? have grown very rapidly (59% faster of local government employees is almost completely paid

than Nevada's economy) to comprise 56% of total state by taxpayers and is rising to unsustainable levels. PERS

FY18 revenues of $13.6 billion. Total tax revenues grew relies on high estimates of future investment returns and

at the same rate as the state economy, and they provide the member growth to hide a growing under-funding problem

other 44%. Gaming and property tax revenues fell sharply in that threatens financial disaster for Nevada. We propose

real terms while tax revenues from non-gaming businesses reasonable levels: 5% expected returns; and 2.5% annual

(including unemployment assessments) rose greatly. The membership growth based on experience. On the other

burden carried directly by consumers and residents (not hand, in investment management PERS has rightly embraced

including the pass-through effects of business taxes) grew indexing in all areas that can be indexed.

slower than their incomes.

VI. Economic Outlook (pages 12-21) ? We identify

III. Health and Social Services (pages 6-7) ? Large four secular trends that have suppressed U.S. economic

amounts of revenues from federal HSS grants cannot be growth in the last decade, thus explaining the "new normal"

redirected to other areas. HSS spending is the largest category of long-term slow economic growth. The first trend is the

of state spending, and it has grown fastest, driven mainly continuing growth of government relative to the economy,

by federal mandates. Medicaid is 64.5% of the HSS total, reflected in public spending, taxes, deficits, debt, regulation

and that percentage has increased due to Nevada's decision of all kinds, and other government interventions. Until

to embrace provisions of the federal Affordable Care Act of 2000, this growing deadweight loss was offset by three

2010. Nevada Medicaid spending will increase in coming growth-inducing factors: 1) demographic and other trends

years, and federal funding that has supported it is uncertain, that increased labor-force participation; 2) the growth of

even as it delivers poor health care results. The doubling in financial leveraging (debt); and 3) rapid growth in emerging

the last 25 years of the fraction of national income spent on economies, plus globalization of firms, increasing trade and

health care reflects inefficiency from increasing socialization foreign direct investment. Turnarounds in recent years in all

of health care and insurance. IV. Primary, Secondary and Higher

DEMOGRAPHIC INFORMATION

Education (pages 8-9) ? State funding of

%

K-12 education has increased at more than twice the rate of incomes of Nevada families and businesses over the long term. Research

Population (end of fiscal year)

FY 2018

3,056,824

FY 2006 Change

2,522,658

21%

has continuously demonstrated little Per Capita Income

46,581

38,535

21%

correlation between student achievement Debt per Capita

979

1,504

-35%

and spending; so, in the absence of K-12 policy reform, it is unsurprising that the

Personal Income *

142,389

97,211

46%

quality of Nevada education has remained Gross State Product *

163,386

123,228

33%

low despite major funding increases. Inflation

259

203

28%

Substantial parts of the cost of higher education have been shifted from taxpayers

K-12 Public School Enrollment

492,416

413,252

19%

to students and their families in Nevada, as Higher Education Enrollment (FTE)**

70,450

62,456

13%

elsewhere. Higher education compensation *Figures in Millions in Nevada and all states is very high. All **FTE stand for full-time equivalent

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STATE SPENDING

three trends mean they too now create an ever greater drag on our economy and produce slow real economic growth of 2% or less annually (1% per-person). Recent federal reforms may help reverse losses due to government over-reach, if they are maintained and greatly supplemented for decades, but tariff increases and other trade skirmishes will vitiate these reforms. We also address innovation, technological progress and productivity; cost disease; income and wealth distribution; and state-specific data that show Nevada is not an exception to national trends.

VII. Policy Prescriptions (pages 21-23) ? Public policy should serve the wellbeing of the people of Nevada and the broad public interest. This means maximizing economic growth, because growth determines aggregate human wellbeing and the policies that maximize it are also those fair to all. Thus, for a long time to come, Nevada needs to rein in the size, scope and reach of government to get it back within optimal levels. We also need to adopt policies

that help reverse the other three long-term adverse secular trends and that move Nevada away from cronyism toward true entrepreneurship and economic dynamism.

This Controller's Annual Report (CAR) provides Nevada citizens, officials and others a summary of key facts, data, analysis and issues on the state's fiscal condition and challenges. For additional detail, please see our Comprehensive Annual Financial Report and other materials available at controller.. The Controller has a statutory charge to recommend plans for: support of public credit; promoting frugality and economy; better management of the state's fiscal affairs; and better understanding of them. This CAR first summarizes and analyzes state spending and revenue sources over the last decade, and provides detail and policy recommendations for major spending areas. Then it presents the long-term economic outlook for Nevada. It ends with some policy prescriptions for better serving the public interest and the Controller's statutory charges.

I. STATE SPENDING: HOW DID NEVADA SPEND YOUR TAX AND FEE DOLLARS?

Table 1 below analyzes Nevada state spending by category. Key conclusions follow.

TABLE 1: NEVADA STATE SPENDING ANALYSIS

State Spending by Category

Health and Social services K-12 Education (3) Law, Justice and Public Safety Higher Education (3) Unemployment Insurance Recreation, Interest & Miscellaneous Regulation of Business General Government Transportation

Subtotal Discretely Reported Component Units Higher Education,Net of Payments From State of NV (3)

Other Discretely Reported Component Units Discretely Reported Component Units Total

State Total Spending (Gov., Bus., Disc.)

FY2018 $ Figures in Millions (1) $ 5,844

2,344 729 718 298 368 148 288 851

11,588

1,193 47

1,240

$ 12,827

FY2006 $ Figures in Millions (1)

2,199 1,240

578 706 239 404 102 371 508 6,347

594 125 719

$ 7,066

Subcomponents and Statistics of Interest

All Other Gov't.(Except, HSS, K12 & NSHE)

$

2,729

Nevada Economy: Personal Income(FY) ($M)

$ 142,389

Nevada Economy: Gross State Prod. (FY) ($M)

$ 163,386

Inflation (BLS West-Urban CPI- Index, FY)

258.9

$ 2,328 $ 97,211 $ 123,238

202.6

Percent of FY18

Spending

46 18

6 6 2 3 1 2 7 90

Growth Rate % 2006-18

166 89 26 2 24 -9 45 -22 68 83

2006-18 Real Per Person % Growth

70 24 -19 -29 -20 -42 -7 -50

7 17

% Growth in Tax & Fee Payers' Real Burdens (2)

81 29 -14 -31 -15 -38 -1 -47 15 25

9

101

39

37

1

-63

-74

-74

10

72

20

18

100

82

16

24

21

17

-25

-20

NA

46

-6

NA

NA

33

-15

NA

NA

28

NA

NA

Nevada Population (FY average) Nevada K-12 Students (Fall Count) NSHE FTE Students (Fall Count)

3,027,432

2,477,401

NA

22

NA

NA

492,416

413,252

NA

19

NA

NA

70,450

62,456

NA

13

NA

NA

(1) Data are taken from CAFR and CAFR workpapers. For consistency Cultural Affairs spending is reported both years under General Government, where it is now classified; before 2014, the CAFR included it under Education, Also, for consistency, Nutritional Education Programs are classified both years under K-12, as they were before 2014, although they are now classified as Regulation of Business for CAFR reporting.

(2) These percentage changes are not due to inflation, population growth, increase in student or HSS client head counts, etc. They are the changes in the Nevada

tax-and fee-payers' burdens in addition to increase in those burdens to cover inflation, population, etc. These percentages are computed based on personal income; if they were computer based on GSP, the increase in burden would be greater because GSP grew slower over the 2006-18 decade than personal income (33% versus

46%). (3) Real Per-person Growth Rates computed based on state population figures for all categories except K-12 and Higher Education, which are based on student head counts.

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STATE SPENDING

1. Health and social services and all education accounted for 79% of FY18 state total spending of $12.8 billion. Their growth totals 93% of the growth in state total spending from FY06 to FY18. In FY18, HSS consumed 46% ($5.8 billion), with primary and secondary (K-12) education taking 18% ($2.3 billion) and higher education another 15% ($1.9 billion). All other activities ? law, justice and public safety, transportation, unemployment insurance, general government, regulation, etc. ? total 21% ($2.7 billion).

2. HSS and K-12 spending grew rapidly while all other government spending, the Nevada economy and the wellbeing of Nevadans declined significantly. The chart below displays the annual state spending growth by major category in real per-capita terms over the last twelve years. Table 1 shows the twelve-year real per-person growth totals: increases in HSS (70%) and K-12 (24%) drove up state total spending (16%), with higher education total spending growing at the rate of the economy, while all other total state spending declined (-25%; although transportation grew 7%). Meanwhile, personal income of Nevadans (-6%) and gross state product (-15%) also contracted significantly.

3. Most importantly, the burden of state spending on Nevada families and businesses, driven by HSS and education, was 24% higher relative to their incomes in FY18 than in FY06. The right-hand column of Table 1 shows the growth in spending on each category as compared to incomes of Nevadans. The growth in burden from HSS spending was 81%. For K-12, it was 29%. Higher education saw a 6% decrease. The total of all other state spending grew 20% slower than incomes. These burden figures mean that, besides covering spending increases due to inflation and growth in HSS client and student headcounts, rising HSS and K-12 spending required families and business to pay taxes and fees 24% higher in FY18 than in FY06.

The following points also are noteworthy:

? More than $3.77 billion (64.5%) of HSS monies was spent on Nevada Medicaid. This spending will likely continue to rise in coming years due to the state's decision to expand eligibility pursuant to the federal Affordable Care Act (Obamacare). However, federal contributions toward this spending decreased in 2018 and will continue to do so, requiring additional state dollars.

? More than $1.6 billion (69%) of K-12 funds was paid from the Distributive School Account to county school districts to supplement their local revenues. By various measures, Nevada K-12 education continues to deliver poor results, despite rapid increases over the last decade in state K-12 spending. Despite the well-known lack of statistically significant correlation between spending and student achievement, in 2015 and 2017 the Legislature and Governor further increased K-12 budgets by hundreds of millions of dollars through FY18.

? Total higher education spending rose 37% over the dozen years, but the state-funded portion rose less than 2%. Large increases in tuition and fees, grants and contracts, and selfsupporting operations (meal plans, housing, ticket sales, etc.) shifted significant portions of the cost burden from taxpayers to students and their families, who get most of the benefit of the services.

? Transportation spending rose from $508 million in FY06 to $802 million in FY12 before falling to $180 million in FY16 and then rising back to $851 million in FY18. Much transportation spending is capital investment in large projects, so there is no trend in annual spending.

? Unemployment insurance costs rose nearly ten-fold from $239 million in FY06 to $2.233 billion in FY12, before falling to $298 million in FY18. The 24% growth rate in spending in FY06 to FY18 for UI is only a small part of the state spending growth total, and it was driven mainly by the Great Recession, poor recovery and federal UI policy. There is no meaningful time trend in UI spending.

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STATE REVENUES

II. STATE REVENUES: WHERE DID THE STATE GET THE MONEY?

Table 2 below presents a comprehensive state revenue analysis. Revenues are classified either as program revenues, which include charges for services and grants and contributions received by the state, or as general revenues, which include mainly taxes and also smaller miscellaneous items. Both program and general revenues come from governmental activities, business-type activities of the state,

and three entities that file separate accounting reports in addition to the state accounting reports covering primary government spending. These entities are called discretely presented component units, and the Nevada System of Higher Education (NSHE) accounts for nearly their entire total.

The points below emerge from Table 2.

TABLE 2: NEVADA STATE REVENUE ANALYSIS

FY2018

FY2006

Percent

$ Figures in $ Figures in of FY2018

State Revenues by Category

Millions (1) Millions (1) Revenues

Program Revenues

Governmental Charges for Services

$ 901 $

769

7

Governmental Grants & Contributions (Op'g & Cap.)

5,296

1,875

39

Business-type Charges for services

134

99

1

Business-type Grants & Contributions (Op'g only)

83

103

1

Discretely-presented Units Charges for Services

768

531

6

Discrete-Unit Grants & Contributions

514

378

4

Total Program Revenues (Gov., Bus., Disc.) General Revenues & Other Net Position Changes

7,696

3,755

56

Discretely Presented Units (NSHE,CRC, NCIC)

Less: Payments from State of Nevada (Primary Gov)

815

814

6

Net, Discretely Presented Units

(706)

(706)

-6

Governmental Activities

109

108

1

Business-type activities

5,035

3,615

37

790

334

6

Total General Revenues (Gov., Bus., Disc.)

Total Program & General Revenues

5,934

4,057

44

$ 13,630 $ 7,812

100

Growth Rate % 2006-18

17 182

36 -19 45 36 105

0 0 1 39 136 46 74

2006-18 Real Per Person % Growth

-25 81 -13 -48 -7 -13 31

-36 -36 -36 -11

51

-6 12

% Growth in Tax & Fee Payers' Real Burdens (2)

-20 93 -7 -45 -1 -7 40

-32 -32 -31

-5 61

0 19

(1) Date are taken from CAFR and CAFR workpapers. Data for Discretely Presented Units covers NSHE, (by fay the largest component) CRC and NCIC.

(2) These percentage changes are not due to inflation, population growth, increase in student or HSS client head counts, etc. They are changes in the Nevada tax- and free-payers' burdens in addition to increases in those burdens to cover inflation, population, etc. These percentages are computed based on personal income; if they were computed based on GSP, the increase in burden would be greater because GSP grew slower over the 2006-18 decade than personal income (33% versus 46%).

1. Government grants and contributions accounted for 39% of total state revenues of $13.6 billion in FY18, and they grew much faster than all other revenues from FY06 to FY18. Program revenues from government grants and contributions (operating and capital) totaled $5.3 billion in FY18. This revenue increased more than $3.4 billion from FY06, and it accounted for 59% of growth in total state revenues. These revenues are mainly comprised of federal government funding for Medicaid, Supplemental Nutritional Assistance (SNAP, or food stamps) and Temporary Assistance for Needy Families (TANF), and they are the revenue side of much of the increase in state HSS spending discussed above. That is, much of this spending is driven by federal mandate and also funded by federal government taxpayers, including Nevadans. A notable risk is that federal funding is sometimes reduced, but federal mandates rarely are. Now and in coming years, Nevada faces just such a problem with Medicaid revenues and spending.

2. Charges for services, grants and contracts for higher education comprise 9% of total state revenues, and they also grew rapidly. Program revenues totaled $1.236 billion for NSHE in FY18, an increase of 36% ($0.33 billion) over the last dozen years.

3. Other program revenues amount to 8.5% of total state revenues, and they grew very slowly. Other program revenues of $1.164 billion grew only 21% ($0.204 billion) since FY06, much less than the 34% nominal growth in incomes.

4. In sum, increases in program revenues, driven mainly by HSS and to a lesser extent by higher education receipts grew rapidly while tax revenues grew only at the rate of the economy. In FY06, most state revenues came from taxes. But over the last dozen years, program revenues grew 105%, becoming 56% ($7.7 billion) of total state revenues. General revenues, consisting mostly of taxes, grew only 46% ($1.9

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STATE REVENUES

billion) and now account for only 44% ($5.9 billion) of the state total spending ($13.6 billion). Although past spending growth was supported mainly by increasing grants and contributions, the 2015 tax increases, plus uncertain federal support will place more burden of future spending growth on taxpaying families and businesses.

Table 3 presents analysis of state taxes by source. There is no definitive source for the right level of taxes relative to

incomes and the economy. However, as discussed in the section below on the economic outlook, the overall level of state and local taxes in the U.S. is already well above publicinterest levels, yet still rising. In Nevada, local-government taxes are the really big problem (due to high spending and employee pay and benefits), and state taxes have been a lesser problem. Turning to trends, Table 3 shows the points stated below:

TABLE 3: NEVADA STATE TAX ANALYSIS

Taxes Analysis Sales and use taxes Gaming taxes Modified business taxes (3) Insurance premium taxes Property and transfer taxes Motor and special fuel taxes (3) Liquor and tobacco taxes Net proceeds of minerals tax Auto lease and lodging taxes (3) Commerce tax Unemployment assements Other Taxes

Total Taxes

FY2018

$ Figures in

Millions (1) $ 1,341

869 584 395 278 428 223

91 260 205 702 272

$ 5,647

FY2006

$ Figures in

Millions (1) $ 1,098

1,003 255 238 319 298 161 20 44 367 172

$ 3,975

Percent of

FY2018 Gen.

Revenues 24 15 10 7 5 8 4 2 5 4 12 5

100

Growth

Rate %

2006-18 22 -13

129 66 -13 44 38

355 491 NA

91 58

42

2006-18

Real Per

Person %

Growth -20 -44 49 8 -43 -6 -10 196 285 NA 25 3

-7

% Growth in

Tax & Fee

Payers' Real

Burdens (2) -16 -41 57 14 -40 -2 -5 212 305 NA 31 9

-3

(1) Data are taken from CAFR and CAFR workpapers.

(2) These percentage changes are not due to inflation, population growth, increase in student or HSS client head counts, etc. They are changes in the Nevada tax- and free-payers' burdens in addition to increases in those burdens to cover inflation, population, etc. These percentages are computed based on personal income; if they were computed based on GSP, the increase in burden would be greater because GSP grew slower over the 2006-18 decade than personal income (33% versus 46%).

(3) Modified business taxes were increased significantly in 2010 and new motor vehicle and short-term vehicle rental and transient-lodging taxes were also added in that year. These changes affect growth and burden rates.

1. The burdens on consumption and on persons of state taxes declined in the last decade. Revenues from the following key taxes fell significantly relative to the growth in incomes: sales and use, gaming and property. The incidence of these declining tax revenues lies greatly with consumption, not with savings, investment and employment; and on persons, not businesses.

2. To compensate for this decline, the state added new levies and increased taxes mainly on savings, investment and employment and on business. It did so via the modified business tax (MBT, which mainly taxes employment) and unemployment assessments; and also partly via the commerce tax, levies on auto leasing, lodging and insurance premium taxes. The large hike for unemployment assessments, was driven mostly by federal mandate. The upshot is that the growth of total tax burden is trending down, but that trend masks a shift of burden from consumption to savings, investment and employment; and from persons to business.

3. Special note on the commerce tax. Claims have been made that repealing the commerce tax, as some folks have proposed, would cause significant harm to K-12 education and that people seeking repeal should state what spending they will cut if the tax is repealed. These claims are wholly false and misleading. There is no direct connection between commerce tax revenues and state K-12 spending; commerce tax revenues flow into the general fund, not an education account. Also, the Legislative Counsel Bureau has determined repealing the commerce tax, considering that it reduces MBT revenues, would cut revenues by $161 million in the first year and $97 million in the second year. These figures are 60% and 36%, respectively, of the annual growth in state revenues, and revenues are growing faster than the Nevada economy. Hence, eliminating the commerce tax would require only that state total spending grow at about the rate of the incomes of Nevada families and businesses, and it would not require any cuts at all in current spending.

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